Biweekly Mortgage Payments: Are They A Good Choice For You?

A mortgage is one of the biggest debts you’ll have in your lifetime. And while you may be working toward tackling credit debt, a car loan, student loans or all the above, your mortgage may be a little harder to chip away at.

But if you’re motivated, you can easily make an additional mortgage payment every year. One way to do this is by switching to biweekly mortgage payments. This means you’ll make an extra payment each year and you’ll potentially pay your mortgage off several years earlier than planned.

However, before hopping on the biweekly bandwagon, take a moment to consider whether this plan is feasible for you. Many factors go into biweekly mortgage payments, so it’s important to know what they are and how they can impact your finances before making the switch.

A biweekly mortgage payment is a mortgage option where you make half a month’s payment every 2 weeks instead of the more traditional method of making 12 monthly payments in full every year. Each year, the biweekly method adds one extra month’s payment that’s applied to your mortgage principal, helping you shave years off your mortgage repayment. In fact, biweekly payments can potentially help you pay off your mortgage 6 – 8 years sooner than planned.

Biweekly payments are half of your monthly payment paid every 2 weeks. Because a year has 52 weeks, this works out to 26 biweekly payments. Since these payments are half the full amount of your monthly mortgage, they equate to 13 full payments.

Biweekly mortgage payments don’t save you money by lowering your interest rate. Instead, they save you money on interest by paying your mortgage off earlier with what adds up to one extra, principal-only payment per year. When you pay your principal balance down faster, there’s less money to charge interest on, which lowers the amount you pay in interest. On top of that, when your mortgage is paid off earlier, it can knock off several years’ worth of interest payments. 

Using real numbers, let’s take a look at how much you’ll save in interest when you use a biweekly repayment schedule.

Let’s say you purchased a home for $200,000 with a 30-year fixed-rate loan. You put down $40,000 (20%) and have an interest rate of 4%. Your monthly mortgage payment is $764, which pays your principal and interest. If you make monthly payments for the life of the loan, by the time your mortgage is paid off, you’ll have paid a total of $274,991 on the loan, thanks to interest.

Now let’s say you decide to make biweekly payments instead. With this payment method, you pay $382 (half your monthly payment) every two weeks. If you make biweekly payments for the life of the loan, once your mortgage is paid off, you’ll have paid a total of $256,288 on the loan, and you’ll pay off your mortgage in 25 years and nine months (cutting 4 years and 3 months of payments off your mortgage).

With biweekly payments, you’ll have total interest savings of $18,703.

As you can see from the example above, biweekly and monthly payments have some big differences: the number of payments you make, how long it takes to pay off your mortgage and the amount of money you end up paying on the loan.

The number of payments you make each year is the biggest difference because it affects how long and how much you’ll pay. By making what amounts to one extra full payment every year, biweekly payments pay off your mortgage faster than monthly payments, ultimately saving you more money.

A monthly payment plan allows for 12 full payments each year (one every month). A biweekly plan equates to 13 full payments each year (or 26 biweekly half payments).

Paying your mortgage biweekly has its benefits, but it also comes with a few disadvantages to keep in mind. Take a look at your finances and consider these pros and cons before deciding which payment option is right for you.

Pros

• Paying off your mortgage faster: A biweekly repayment schedule can help you pay off a mortgage early by several years.

• Paying less in interest over time: Biweekly payments can contribute one extra full payment on your principal balance per year and cut down on accumulating interest.

• Building equity and helping cancel PMI: Biweekly payments build up your home equity. And if you have a conventional loan, you can request to drop your private mortgage insurance (PMI) payments once you have 20% equity in the home. This will save you more money each month.

• Simplified budgeting: This payment plan could make personal budgeting easier, especially if you’re paid biweekly for your job.

Cons

• Fewer funds for housing expenses: The extra payment toward your mortgage per year can be tough if you’re on a tight budget already. If you’re living paycheck to paycheck, that extra payment might be better spent elsewhere.

• Additional processing fees: Your mortgage lender may charge a setup fee as well as transactional fees. If your lender doesn’t offer biweekly mortgage payments, third-party payment processors may also charge extra fees (more on this below).

• Possible lender prepayment penalties: Some mortgage lenders have a prepayment penalty, meaning you could get charged for paying your mortgage off early.

• Failure to reap the full benefits of biweekly payments: Some lenders or processors still only apply your payments once a month, even though you’re paying twice or more a month. As a result, you won’t save as much in interest, because the payments won’t be immediately processed.

Thanks to technology, you should be able to easily set up a biweekly mortgage payment on your lender’s website. Nonetheless, some lenders use third-party processors who charge a fee for this service.

For Rocket Clients Who’d Like To Switch To Biweekly Payments

Rocket Mortgage^® clients can now set up biweekly payments for free, helping save you money on interest. Learn more about the mechanics of switching your payment method to pay off your mortgage easily.

If you’re not certain you have the financial wherewithal to commit to biweekly payments, you have choices. Let’s explore some of them. 

Bimonthly Mortgage Payments 

Bimonthly mortgage payments differ from biweekly payments because you’re making a payment twice per month, which equates to 24 bimonthly payments, or 12 full payments total – the same number as the monthly option. 

It may be convenient to set up automatic bimonthly mortgage payments if you get paid twice a month, but your principal mortgage balance at year’s end won’t be any lower than it would be with traditional monthly payments.

Additional Principal-Only Mortgage Payment

You can always commit to saving at a less burdensome pace than with biweekly mortgage payments. One way to do this is to make an extra payment at some point during the year, when the timing best suits you. This is known as an additional principal-only mortgage payment. Just make sure you clearly communicate with your lender that the additional payment is to be applied to your principal. Otherwise, it might be applied to your interest or even your escrow account.

A Rate-And-Term Refinance

If you’re a few years into repaying your mortgage, a rate-and-term refinance can help you move from a 30- to a 15-year fixed loan while lowering your interest rate. It’s a refinance, so you’ll have some associated costs, but rate-and-term refinances tend to be less costly than cash-out refinances. 

Biweekly payments are a mortgage payment option that can allow you to make an extra full payment each year. This can help you pay off your mortgage earlier and reduce the amount you pay in interest in the long run by thousands of dollars.

Want to work toward a debt-free life? Check out our tips for paying off your mortgage early.